What’s the Best Way to Stimulate the Economy?

NEP’s William Black is part NYTimes.com’s Room for Debate. You can view his questions that senators should be asking Jack Lew at his confirmation hearings as well as the subsequent comments and debate at NYTimes.com.

Minimum wage hikes cut two ways. Businesses might shift to higher-skilled or full-time employees in preference to larger numbers of part-timers. The unemployment rate might go up. The philosophical problem with the minimum wage is not about full-time workers supporting families, it is about part-time high school students. Why do they need any particular minimum wage? They support nobody, and typically have low skills, so that businesses cannot pay them high wages and still make profits. Rather than minimum wage, the Job Guarantee would allow full-time breadwinners to support their families, while also allowing businesses to hire as many part-time teenagers as they want at whatever wage is economically justified.

Reinstating and doubling the partial FICA tax holiday would be better.

Romney’s tax cut, 20% in all rates across the board, would be even better.

Full MMT implementation would be best, but would require a paradigm shift.

Building and repairing infrastructure (that it is responsible for) is a government responsibility in good times and bad. It should not be used as an economic stimulus program. But now would be a good time to start doing what has been neglected for too long.

Many people who aren’t teenagers work at the minimum wage. But that’s beside the point. People making the minimum wage, no matter who they are, are the most likely to spend the dollars that they earn. Raising the minimum wage puts more money into their pockets and thus the economy. Would prices rise? Maybe, but those price hikes are shared among everyone. It is a redistributive policy, and as such, it is worth doing.

Even better would be to set a maximum wage to go along with the minimum wage.

P.S. – Studies have looked at shifts in unemployment under a minimum wage hike and have found no impact whatsoever.

I’m getting deja vu. If there’s no adverse effects, why stop at a paltry $9. Why not $30, or $100?

BTW, raising the minimum wage adds no extra money to the economy. The extra wages, if any, paid by private sector employers were in the economy already. If the Federal government has minimum wage workers, and increases the deficit to pay them more, then that would be more money in the economy. (They could do that without changing minimum wage laws, though.) Raising the minimum wage does shift money from some people to others, but it is not clear to me who the some and the others would be. If the others do have a higher marginal propensity to spend, then aggregate demand would go up.

While more money in the economy would be nice, it isn’t essential. The important thing is to get the money that already exists moving. And why not $30/hr? I’ll suggest that the amount isn’t what’s important, it’s relative distribution and changes therein. A change from $7.25 to $30 in short order would be disruptive to the cost of doing business for those that employ minimum-wage workers — costs couldn’t be passed along quickly enough for many businesses to keep operating.

No, it’s because if a person (or the job) is capable of producing $10 an hour worth of output, and you are forced to pay $30, you won’t pay him at all. If McDonald’s teenagers made $30 an hour, a McDonald’s hamburger would cost the same as a Morton’s steak. Which one would you buy? How many hamburgers do you think McDonald’s would be able to sell? It doesn’t matter if you raised it overnight or over the course of years.

For a small increase, say $7.50 to $9, businesses will try to raise prices, and some will succeed while others fail, and go out of business. Workers formerly earning $9 or more will try to demand increases (especially union workers who have such clauses in their contracts already), and prices generally will rise so that the thing that used to cost $7.50 now costs $9, the minimum wage workers who kept their jobs or got other minimum-wage jobs are back where they started, and workers who were slightly above minimum and were not able to negotiate raises beyond $9 will be less well off than before. Non-workers without COLAs will suffer the most. The rentier class will be unaffected.

The problem with comparing the 1968 average to today is demographic. In 1968, baby boomers were just entering the workforce, in entry-level jobs, biasing the average wage toward the entry-level wage. Today baby boomers are nearing retirement, in their peak earning years. The entry-level wage today has far less influence on the average, while prices and productivity have risen in tandem with the average boomer’s wage. While entry-level workers today may be less well off than in 1968, the individuals who were entry-level in 1968 are much better off than they were in 1968, because of their increased productivity. And as the baby boomers retire, those behind them in the workforce will become more scarce and more sought after.

JG is a much better solution than the broader price-fixing attempts of a minimum wage law. If the family breadwinners cannot get a job at better than minimum wage, they will choose JG and the private sector marketplace will respond to the loss of their labor by hiring others and/or raising wages, as long as they can still make a profit by hiring. And teenagers will still have job opportunities that match their productivity.

The suggestion of $9 per hour is truly ludicrous — the minimum wage used to be tied to worker productivity, only it was disconnected during and by the Geo. H.W. Bush administration.

Tied to worker productivity these past years, the minimum wage should be realistically between $24 to $30.

That’s what we call simple arithmetic.

The major problem with all these discussions is that the vast majority of Americans don’t understand three important facts:

(1) What the largest entitlement program is: the “right” to create money.
(2) Who the enemy is: the super-rich had wield that so-called “right,” and,
(3) arithmetic — and therefore when incredibly massaged and manipulated employment figures are cited, or house sale figures are cited, or, in too many cases, obviously contradictory numbers are reported (perhaps one should say, falsely reported), Americans glibly and blithely repeat such nonsense as if they comprehend what they are prattling on about.

To stimulate a consumer-based economy, first there MUST exist such an economy; the American economy has been dismantled over the past thirty-some years, and what is left is a fantasy finance based economy.

There was a class action lawsuite not too many years back, based upon a stated 7,000 small, public companies shorted out of existence by hedge fund speculation (actually, quite a few more than that, but those were the signers of that class action suit).

It was brought against the DTCC (culprit by their SBP, or Stock Borrow Program, allowing for naked short selling); a perfect example was a fellow who bought all the outstanding shares of a small outfit named Global Link, and sat back and watched, over a 48-hour period, as those shares were traded back and forth millions of times, a technical impossibility — excepting for that DTCC’s Stock Borrow Program.

After offshoring maximum number of jobs, maximum amount of technology and maximum amount of investment, there is little real left of this economy — first a consumer-based economy must either be re-established, or an entirely new, and radically different form (say, an economic democracy) be put in its place.

(P.S. It should also be pointed out that severl years ago, after all that hedge fund speculation on small businesses, congress passed small business loan legislation giving preference to loans to small businesses which had already been invested in by hedge funds and/or private equity funds!)

The minimum wage was raised to $3.80 from $3.35 in 1990. You say today it should be $24 to $30 if it had increased the same amount as productivity.

That means productivity today is approximately 6-7 times what it was in 1990? That seems hard to believe. At 3% a year, it would only double in 24 years. CPI was 129 in April 1990, 229 in December 2012. Not quite double. I could believe $14-$16, if you could provide some evidence that entry-level worker productivity has increased as fast as the average.

Naked shorting is supposed to be illegal, so if it is going on that is the fault of the regulators (and I have no doubt that it is). But if I owned all the shares of one company, and it was still being naked shorted, I’d raise my bid for more shares until I owned 130% or so, then I’d ask for certificates. Talk about a short squeeze opportunity!

That was pretty much what Bush did, and it put off the recession for a quarter or so. As I recall, it was widely ridiculed by the left at the time. Given that reception, it’s not likely to be repeated. Too bad.

Actually, what Dubya did with the “tax rebate” of 2007 was merely to defer the withholding of the refunds that would have been due the next year and issue them earlier. Also, most payouts were more than wiped out by the oil/gas price spike back then (remember that gas prices were pushing $4/gal back then).

Rebating money to the taxpayers is never a bad idea….but let’s distribute it to those who need it the most.

Not to bust any bubbles here, but there isn’t going to be a minimum age increase with a Republican House of Representatives in charge. Anyways, $7 or even $9 an hour is a joke. Hell, the minimum wage is a joke, period.

Raising the minimum wage enhances the purchasing power of some consumers, but at the expense of others. If the business owner can raise prices and maintain volumes, it is at the expense of the customers of the minimum wage workers (who may pass it on to their other suppliers, in the form of reduced purchases). If he raises prices and sales drop, it is at the expense of the co-workers who lose their jobs or get their hours reduced. (Apparently studies indicate that this is impossible.) If he can’t raise prices and stay in business, it is at the expense of the business owner, and he may respond by changing the mix of minimum wage workers, other workers, and automation in his production process. Or he might just go into a different business. The rise in inequality that has accompanied the rise in the minimum wage over the past 45 years tends to indicate that business owners do not absorb the cost themselves.

Raising the minimum wage enhances the purchasing power of some consumers, but at the expense of others. Not necessarily. Not overall. It is not necessarily a zero-sum game. There is a good case that raising the minimum wage would increase employment now. The business owners might increase volumes (coming from the increased demand from the min wage workers) and keep the same prices, so they might not lose because of the wage hike. Demand could increase enough that they could hire more workers.

BTW, raising the minimum wage adds no extra money to the economy. The extra wages, if any, paid by private sector employers were in the economy already. If the Federal government has minimum wage workers, and increases the deficit to pay them more, then that would be more money in the economy. No, it could in effect “add extra money”. Money is not necessarily currency/NFA/state money. The extra currency, which might be paid by the employers and saved by the workers is in the economy already, yes. But raising the minimum wage can enable a given amount of national deficit spending to have a greater economic effect. A minimum wage hike could increase the bank money going around. It could act something like a “balanced budget multiplier”. Another way of saying this is that the velocity of money/currency could increase.

The rise in inequality that has accompanied the rise in the minimum wage over the past 45 years tends to indicate that business owners do not absorb the cost themselves. Lagging minimum wage raises have abetted, increased the rise in inequality over the last 45 years. “Accompanied” suggests that raising minimum wages caused the rise in inequality. But back when minimum wages rose more in line with productivity, the US had less inequality.

Auerback: The minimum wage story is not just a story about income inequality, but rather it’s about an elite that has hijacked the economic system and made it work less productively than before while redistributing more of what is working to themselves.

The problem with our economy today is that the growing gap between the real wages and productivity has violated the traditional relationship between real wages and consumption. So if the productivity of each worker is rising strongly, yet that worker’s capacity to purchase (the real wage) is lagging badly behind – how does economic recovery which relies on growth in spending sustain itself?

So, I guess that the solution would be to eliminate the payroll tax, then, and sacrifice Social Security, Medicare and the social welfare of the poor, and still keep the minimum wage below its real purchasing power??

No, thank you.

I have a better idea: How about we encourage more union organization so that workers can be paid a more equitable wage, then make the payroll tax more progressive (with all ceilings on elegible income for taxation removed), reform the tax code to rid it of all corporate/wealthy loopholes and make it more progressive, and then use MMT (via HPCS) to fill in the gaps to fully fund social programs and livable wage jobs??

We’re not asking for a $200/hr mininum….$12/hr will do quite nicely, with relief for those small businesses willing to pay that rate.

Higher minimum wage would be alright it would not mark on which jobs are low income. People need to be motivated and happy. If people are to have jobs than you need jobs that aren’t marked as low income, but allow people opportunities to improve and develop working up to a higher tax bracket. Generation today is forced in spending money on education without a guarantee there is a job opportunity four years in the future. How many times is a person spending large amounts of money directed at the education system, not consumption and building sustainable lives. People are denied jobs for being over qualified, and under experienced. The problem is people need jobs that match their education, passion and expertise. Graduates have degrees and gaining experience in a totally different field, the gap between understanding the job market and fulfillment in an area of expertise is high. People getting older gaining education not experience does not stimulate the economy.